There’s nothing like a deep bear market to get folks talking about a lot of financial nonsense.  The rhetoric I’m hearing these days takes me back to October of 1998 and the Long Term Capital fiasco - a hedge fund collapse that came darn close to bringing down the house of cards. 

More recently (and more importantly), a group of researchers from Dimensional Fund Advisors reviewed the performance of the S&P 500 from January 1970 to December 2006.  The annualized return for that period was 11.1%.  

But here is where things get interesting. 

When the researchers removed the 25 best performing days of the market over that 36 year period (less than one day per year), that 11.1% return dropped to 7.6%.  A HUGE difference!

So what does one learn from all this?

First, tell your friends and family to quit making short-term changes to their investment strategy based on their emotions.  They are foolish if they do.  Woe onto anyone that thinks otherwise.   

And second, ignore the headlines in the financial media and all predictions telling you about the best stocks to own.  Here is a great example why:

AIG and Merrill Lynch?  Seriously, what were these editors thinking?

It sort of reminds me of that lyric from the Beatles’ “Nowhere Man”:

He’s as blind as he can be/Just sees what he wants to see.

In any case, what you’ve witnessed in the market over the past couple of days is another classic stampede that occurs every so often.  Bottom line:  Don’t do anything with your finances you will one day regret.  Although easier said than done, I know.  

But the fact remains that throughout human history, there have been numerous financial disasters far worse than anything we are experiencing today.  Millions of people prospered shortly after those times simply by remaining diversified in the market and not following the crowd.  I cannot find a reason why you and I should not do the same.    

Stay tuned, I will do my best to help you come out on the profit end of this unique and opportunistic environment. 

Be sure to tune in to our radio show each week for more discussion. 

Have thoughts or questions?  Leave them in the comment field below.

Related Articles:

• Stock Market Volatility & Investor Expectations
• Gut Check Time and the Transfer of Wealth
• Lessons from an Innovator in Global Investing, Sir John Templeton
• The Story On Derivatives

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Aron Huddleston talks with WOWT in Omaha about what investors should be focusing on in today’s market environment:

 Video used with permission of WOWT

Update:  The transcript to Roland’s video can be viewed by clicking the link below.

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The below article was written by my colleague Dave Blair and published in our client newsletter this past summer.  In light of public perception, it deserves a second look:

As the markets continue to stumble along driven by fear and emotion, some people have asked if they should be getting out of the market to “protect their investment.”  Note that these are not clients asking the question, our clients already know the answer.

Short term volatility is the price we pay for long term success in building wealth.

You can see this chart in Roland’s new book, Manarin On Money.

Over time equity ownership positions have moved up and down but have always trended up.  Like a yo-yo climbing a flight of stairs.

Market timing requires two perfect decisions, whereas, staying invested in quality, professionally managed stock mutual funds requires only one decision.  Nobody makes two perfect decisions all of the time. 

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After sketching this crude drawing on the back of a napkin, my hunch is that you are annoyed the stock market isn’t moving past the C dot.  Everyone experiences this at some point or another. 

We all like that ride from the dot in the lower left corner to dot A. 

The A dot is where you feel good; money is being made.  The A dot is when you see your brokerage account statement each month and smile. 

Being the free market capitalist that you are, you want that ride to continue.  Time goes on and eventually you find yourself at dot B.  Yes!

But then something happens.  Something you haven’t experienced in some time.  You start to go backwards.  Surely this is just an anomaly that you will soon return you to the B dot.  It isn’t.  Instead you find yourself at C.  Major bummer.   

The C dot hurts.  It’s uncomfortable.  And it’s where undisciplined investors bail out.  They change their investment strategy to something that instantly makes them feel better or to something they hope returns immediately to B – most often both lead to poorer results. 

So here you stand today at dot C.  It’s a difficult job to hang tight.  On one hand you see your peers bolting for the sidelines where their money is now earning less than inflation.  But on the other your patience is wearing thin.

You wonder:  When the heck will we see that breakout rally?

In doing so, you realize that you are only looking at a partial version of the chart.  The Big Picture version looks more like this:

Here you discover the C dot is the worst possible place to quit - especially when you take into account what often follows. 

REALITY CHECK:  To get to the D dot you must first endure the C dot, which right now is feeling awfully crummy and is never a fun place to be.

The path to D is not linear and rarely pain-free.  If it were, people with more brain power than you and I would have figured it out by now.  Sorry.  The best way I know of to get there is time, discipline, and knowledge even though the high-voltage Wall Street egos would have you think otherwise. 

The market is still a yo-yo climbing a flight of stairs.  Sooner or later, you must come to terms with this fact. 

One day later down the road when you look over your shoulder at history, my bet is that you will see this as a short-term blip.  Chances are good that you will be kicking yourself for having not taken advantage.     

Though it’s easier said than done when the panicky chorus of doom-and-gloom is surrounding you. 

One last thing to point out - see what happens after the D dot?  Will you be ready?  As the saying goes, “Forewarned is forearmed.” 

When talking about the stock market these days, it’s easy to be wooed into becoming a long-term pessimist.  Last Friday, the S&P 500 closed at 1239.  Contrast that to where the index was trading at 10 years ago - 1164 - and you end up with a gain of about 6.4%. 

So why am I still so enthusiastic about my “stocks for the long run” philosophy? 

Take a look at history. 

The last time we went through a similar market environment was from about 1969 to 1982.  Not only were the returns middling but inflation wiped out the gains that investors had earned leaving many with a real return in negative territory. 

But people who maintained their discipline and continued acquiring equity positions were rewarded for it. 

From 1983 thru 2001, vast sums of wealth were created because certain people understood the gift the financial gods had given them and knew how to take advantage of it.  Or there were others who prospered simply from dumb luck for being in the right place at the right time. 

You see, tangible assets - real wealth - does not vanish in a market decline.  Instead, uninformed investors panic and sell their wealth while savvy investors go bargain hunting.   

And that’s the way it has been throughout history. 

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Selling a stock short means borrowing shares from a broker to sell with the idea that you can buy the shares back at a lower price and deliver them back to the broker, while you keep the profit.  The above chart shows the level of short interest on the New York Stock Exchange, which has spiked up considerably. 

This is what we call a contrarian indicator; you can see it has signaled market lows in the past.  In the three previous short interest peaks, the S&P 500 Index returned an average of 27.1% the following 12 months. 

If you’re like many folks who look at this stuff and say, “huh?” . . . let me say that this is good news, and only happens near stock market bottoms.  So there is light at the end of the tunnel, and it’s not a train!

Stay tuned . . .

Note:  Chart courtesy of JPMorgan Asset Management.